Closer look: Companies face shrinking margins, slow receivables

President Obama’s economic stimulus package has poured about $150 billion into the economy since its passage in February, boosting overall economic output by about 2.3 percentage points during the quarter that ended in June, according to a September article in The Washington Post. But the economy remains in recession and has shed more than 3 million jobs since the stimulus money began flowing, and business owners continue to face shrinking margins and slow receivables.

“We have been bidding work with approximately 25 percent lower margins to get our share of the projects available, which are fewer than before the recession,” says Courtney Little, president, Ace Glass, Little Rock, Ark. “Our receivables under 90 days have grown, but we have very little that is substantially overdue. Our overall volume is down 18 percent since the recession. Most of our current volume comes from schools, universities, and hospitals; basically, government or public supported projects.”

Little says private commercial construction has been affected the most by the recession, while Kevin McMahon, president, K-Man Glass Corp., Bethel, Conn., believes public projects have been more affected. “There will generally be a significant amount of bidders and the project will always go to the lowest responsible bidder,” he says. “I have yet to see a low bidder thrown out because they were deemed to be not responsible! If they can post a bond they will be considered responsible. The strategy contractors use in this environment is to take the job low and negotiate lower prices with the subs.”

In his geographic area, commercial work and lower-priced tract housing have taken the greatest hit, says Bill Evans, president, Evans Glass Co., Nashville. “High-end custom residential work has slowed some, but little in comparison to commercial and lower-end tract building.”

Before the slowdown, Evans Glass’ margins were approximately two to three times greater than they are presently, Evans says. “This is due to the smaller amount of work that exists, but also because many of our competitors panic and hastily reduce their markups.” Time to collect receivables has increased from 45 days to 60 days to a minimum of 75 days, and often 90 to 120, he says. “Owners/developers are not paying the general contractors as promptly as before the slowdown. This may stem from the tighter commercial lending practices of banks and/or regulations from ‘Big Brother’.”

Although his company is stretching its payments to its suppliers, its relationships haven’t been impacted, Evans says. “Our suppliers are experiencing slow collections just like the glass shops,” he says. “They understand, even if they don’t like it. I make a point of telling them we will be slow paying, but we will be paying. Suppliers are also reducing their prices, just like we are to our customers. Everybody understands the situation and, so far, seems to be cooperating.”

Little agrees. “They [suppliers] have also lowered their prices to compete in this market and are spending more time chasing each project and taking care of us because we pay our bills.”

McMahon points out that the vendors are operating along the same lines as glass shop owners. “They realize that the projects with the higher margins are going to be with glass shops with the strongest customer base, and they are making strong efforts to align themselves with those shops and offering the same type of services.”

Like Little and Evans, McMahon also has experienced slow collection, particularly with retainage, and shrinking margins. “Contractors and owners are hanging on to cash as long as possible,” he says. “That's why quality and service are more important than ever. Contractors/owners are in some cases demanding unrealistic standards to cease the opportunity to hold onto your cash until they are satisfied, or they will look to negotiate a settlement."

With margins, “We make every effort to maintain our standard margin but will negotiate given a last look opportunity,” McMahon says. “Generally, we will not lower our margin more than 10 percent without some sort of value engineering.”

For his part, Robert Brown, owner, Brown’s Glass, York, Pa., is more concerned about 2010 than 2009. “As of now, we are busy,” he says. “We have several large projects that we landed last year and have hit it all about the same time. I believe we have enough work to carry us to the end of 2009.”

Brown’s Glass’ estimating is up 30 percent to 40 percent ahead of last year’s numbers, Brown says. “As far as shrinking margins, that is hard to say, because right now we are bidding, but very few jobs are being awarded to anyone. They will shrink in 2010.” It’s hard to get a feel for the current market, he says. “On the residential and retail sides of the business, we are busy one week and slow the next. It’s hard to predict.”

His company works hard to stay on top of receivables, Brown says. “Our receivables are about the same: 30 days to 45 days. What concerns me more are customers we’ve done business with for years and never had any problems with.” They don’t show any signs of financial stress, their receivables are normal, but suddenly they go out of business. “There are seldom any assets left after the banks and attorneys get their monies to flow to sub-contractors.”

His suppliers also are working harder “by offering better lead times, new product lines and lowered prices to get a share of the business we have to give to them,” Brown says. “We are current with all our suppliers.”

To stay on track

Companies have put their own coping mechanisms in place to ride out the recession. “We have spent most of our energy cutting overhead and increased our advertising budget to pick up more small commercial projects, service work, and residential remodels and repairs,” Little says. “Our total overhead is down about 5 percent and our advertising budget up about 15 percent.”

Brown’s workforce is down about 20 percent to 25 percent from two years ago, he says.

Evans is cutting markups and reducing margins commercially. “Additionally, we are less selective about the type of work we bid,” he says. “We have also reduced our margins residentially, but much less than commercially. We are more aggressive in pursuing our receivables. We emphasize COD, deposits/balance upon completion/credit cards more now. We also are stretching our suppliers when possible, but trying not to be abusive to them. It’s just more critical now to watch the cash flow.”

Brown agrees. To stay ahead of the curve, he advises other company owners to “sell any unneeded vehicles, monitor labor needs closely, buy product as best as you can, reduce inventories, and the big one, conserve cash!”

This is a “cash is king market,” says McMahon “and if we feel that a particular customer will pay quickly, they will get our rock bottom pricing.” He is focusing on his customer base and offering value engineering, design help and price help. “But we take a hard look at the customer before we price aggressively. We do, however, have good customers that we have done a lot of work for over the years and work with on extended terms.”

Little advises other companies “to look closely at fixed and variable costs to see where cuts can be made without affecting quality; increase and reallocate advertising dollars to where you see results; do not bid projects at or below cost plus overhead; and spend time building relationships to increase sales today and in the future.

“The one good thing about a recession is that it forces us to evaluate our businesses and hopefully come out better than before,” Little says. “They say if it doesn’t kill you, it will probably make you stronger.”